Q3 2023 cbdMD Inc Earnings Call
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Pardon the interruption. This is the operator, please be aware that this call will be slightly delayed due to filing technical difficulties. Please stay on the line.
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Arden me. This is the operator, please forgive the interruption. Please be aware that this call will be getting momentarily. Thank you for your patience.
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Pardon the interruption. This is the operator. Please standby this call will begin momentarily we thank you for your patience.
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Good afternoon, welcome to see B D. M. D. Inks June 30th third quarter of fiscal 2023 earnings call and update this afternoon. The company issued a press release that provided an overview of its third quarter and nine month fiscal results and will file its quarterly report on Form 10-Q later today today's conference.
Call is being recorded and will be available online along with our earnings press release, covering our financial results and non-GAAP presentation at C. B D. M D. Dotcom in accordance with C. B D. M. DS retention policies all participants on this call are in listen only mode. This call will be followed by a question and answer.
Session at this time I would like to turn the conference over to Brad Whitford, The company's VP of Finance Brian . Please go ahead.
Thank you Ariel and thank you all for joining the <unk> June 32023 third quarter of fiscal 2023 earnings call and update on the call. Today. We also have run in Kennedy, our interim CEO and Chief Financial Officer, and Dr. Civil Swift, Our Chief Science Officer.
We'd like to remind everyone that various remarks about future expectations plans and prospects constitute forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
<unk> cautions that these forward looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated including risks described in the company's annual report on Form 10-Q for the quarter ended June 32023, and our other filings with the SEC all of which can be reviewed on the company's web.
At Www Dot CBD M D dot com or on the SEC's website at Www Dot FCC Dot Gov.
Any forward looking statements made on this conference call speak only as of today's date Thursday August 10, 2023, and C. D. D. M. D does not intend to update any of these forward looking statements to reflect events or circumstances that would occur. After today's date, except as may be required by federal securities laws with that I'd like to turn the call over to Rudy.
Thank you Brad good afternoon, everyone, especially to our shareholders I appreciate your patience, while we were dealing with some technical issues with the pack.
Our results in the third quarter show ongoing stabilization of our business as we continue to execute on a sound strategic plan. We continue to operate in a challenging environment, but our team has been up to the challenge and is consistently delivering quarterly improvements we had a busy quarter on which we had a reverse stock split capital raise.
Is it completely changed out our e-commerce operating platform.
Credibly proud of our team for their dedication and focus resulting in significant year over year operating income improvement along with numerous sequential gains.
Year over year, our efforts resulted in a $30 million improvement in GAAP income from operations and non-GAAP adjusted EBITDA improvement of $2 1 million for the quarter.
Cash SG&A costs dropped approximately $4 million year over year, well over 11 overall revenues demonstrated sequential stability or direct to consumer revenues experienced growth overcoming challenges stemming from the E. Commerce platform transition and that is industry category, a little changes sequentially cash SG&A costs continue to come down.
We're at our lowest level since the merger at the end of 2018.
We made further improvements to our non-GAAP adjusted EBITDA by 200000 over the March 2023 quota.
An analysis of our operating income and non-GAAP adjusted EBITDA over the last eight quarters or deals a robust trend of sequential games underscored by the comprehensive transformation of every facet of our business. We continue to operate with conviction in haste and based on our current trends expect ongoing improvements during the fourth quarter.
On our last call I spoke about identified challenges with conversion and our ability to be nimble, we made the determination to migrate or ecommerce platform to the platform built for today's direct to consumer E. Commerce businesses. We completed the transition in mid June with no negative impact to traffic and performance.
Now focused on the second phase of the transition to optimize our customer experience. We are just getting started to leverage neutral rules to drive conversion subscription of Lv and are starting to ramp up our marketing expense to drive traffic and revenue.
We successfully grew a profitable customer acquisition on meta during 'twenty AR during the third quarter until they change the category rules. You know again it took us into mid July to clear the new rules and were working to rebuild to prior performance. We've identified several needle us acquisition channels and are working expeditiously to achieve results from these <unk>.
During the fourth quarter.
Our marketing team has been hard at work building, a strong pipeline of opportunities and partnerships to enhance our brand awareness through the balance of the calendar year. They continue to focus on elevating our brand image and quality of content with everything we are doing both on and offline.
Now that we have a full operating quarter of experience in the U K on Amazon.
The numbers are not as large as we want them to be yet, but we are seeing weekly growth accelerate as we learn we believe that over the coming months, we will have the potential for meaningful revenue stream and expand the ways, we can leverage the Amazon platform.
We continue to listen to our customers and innovate from their feedback, resulting in an expansion of our strong performing hemp derived out of my life.
Well, we only a week into this launch we are getting positive feedback from consumers and wholesale customers alike.
Development and innovation are important tenants, providing customers with novel and effective natural wellness solutions.
We are excited about our forthcoming additional line extensions, which we expect to announce before the end of the fiscal year.
We've made tremendous progress on our business this year and are zeroing in on positive EBITDA.
Well operations continue to improve we are similarly focused on our capital structure and balance sheet.
We are actively looking to monetize assets on our balance sheet and have several groups focus on a solution to arrest corporate please.
In the past several quarters, we've had multiple conversations on M&A, but it has the potential to transform our company get stalled after clarification of our current challenging capital structure.
This is punitive and preventing potential significant value creation for both classes of our shareholders.
We have over $20 million, a combined market capitalization between our common and series a preferred shares.
August 1st we filed the proxy statement for a special meeting of shareholders a proposal to convert our outstanding series a preferred shares to common shares of <unk>.
And I strongly believe that the proposal addresses multiple strategic reasons that benefits both class a shareholders.
First we believe converting will have a significant positive cash flow impact to the company, we are making strong EBITDA progress, but the dividend creates a significant higher hurdle for sustainability.
We believe in all common structure should enhance liquidity for the current preferred shareholders.
Limited share trading volume from which to monetize their investment.
Additionally, we believe in a I'll call it capital structure position shareholders for stronger potential upside, especially as we continue to improve our financials and hit our goal of positive EBITDA.
The proposal also significantly enhances our ability to attract strategic deals as well as M&A and utilize our public currency for the right accretive strategic deals.
There are several other strategic benefits outlined in our proxy statement and we will be reaching out to many of our shareholders in the coming weeks.
Our shareholders are urged to read the definitive proxy statement and other relevant materials when they become available.
Before I turn things over to civil I want to share some context about why we continue to double down our efforts to engage Washington, two are directing engagement supplement industry trade groups and working with multiple cannabinoid industry advocacy groups.
Recently as the June quarter, I can attest that the government agency statements and rhetoric this year styrene and reverse the committed prominent retail national rollout of our THC free broad spectrum products. The lost opportunity was challenging and close our progress consumer should be concerned.
Despite being a well established ingredient that has been available for decades and has undergone the same rigorous safety and efficacy testing is hundreds of other dietary supplements.
D products like ours are bill side, that's scaring reputable national retailers in the category, while married up multiple multi letter new and synthetic compounds with no safety or widely available on tens of thousands of doors and nationwide.
So under no illusions or a quick silver bullet sex.
Excited about our progress building a profitable future in the absence of any regulatory change I continue.
To be encouraged about the growing support from our elected officials as well as the other respected industry competitors uniting efforts to address policy out of D. C.
I'll turn it over to civil.
Thank you Ronan.
The comments are focused on two key areas today.
Updates on our science and our lobbying efforts.
Our commitment to science has demonstrated that our products are safe and our core broad spectrum, Glenn is effective for mood improvement.
Pain reduction and reduction of inflammation in healthy adults.
This data has paved the way for partnerships with world renowned institutes, such as the University of South Carolina, and the Steadman Philippon Research Institute, we are collaborating with both organizations to submit proposals to congressionally directed medical Research program C. D. M. R. P O.
Request for proposals.
Our study with Wuxi to gather data about our core broad spectrum blends impact on sleep and recovery is kicking off this week with participants that include professional athletes and professional sports team trainers, we have recruited and won't begin collecting data this month.
We have discussed our steps to address the lack of regulatory clarity at the federal level.
We are actively engaged with several trade associations across the Hampton dietary supplement space.
The start of the calendar year.
We have been in D. C on the hill directly lobbying and with our association every month.
The tone and tenor of these meetings has changed significantly since the company first began lobbying in 2020.
Congress people are asking questions about FDA.
And their inaction and actively participating to find a solution.
I'm being asked direct questions about my time at the agency.
Congress people want to know my opinion on the FTA statements in opposition to a regulatory pathway as a former FDA official.
These meetings have included time spent with representatives commerce chief of staff and lead oversight counsel.
Representatives come or recently holding oversight hearing where stakeholders presented their opinions on safety regulations and other key topics.
Prior to the hearing representative comers office requested that I provide a written statement for the record based upon my almost six years of experience regulating dietary supplement, Florida, the FTA and.
C. D. M. D has experienced to date with the FDA with the goal of providing clarity on how the FDA can adequately regulate hemp derived ingestible and topical cannabinoid products undercurrent authorities.
Following the oversight meeting by current camera with a request for information to subject matter experts and stakeholders regarding FDA regulation of CVD.
What's issue this is an opportunity for our industry to stand together and present, our arguments as to why we deserve federal clarity and an opportunity for clear regulations, we're leading efforts to refine responses for many of the leading CBD brands to ensure that we are aligned we are working with our trade associations and independently to submit responses to their request for information.
To ensure that our industry is represented in a manner that resonates with the energy and Commerce Committee and help committee members to receive make sure that they receive information they need to support a path to federal regulation.
But CBD Hendi, we are keenly aware of their rules and guidelines for providing safe dietary supplement products to consumers under the dietary supplement health and Education Act.
We have adhered to the four corners of these guidelines to our commitment to third party cgmp certification proper.
Proper labeling with adequate instructions for years, I forget adverse event tracking and reporting and independent safety testing of our hemp derived cannabinoid ingredient.
We go the extra mile by publicly posting current certificates of analysis detailing the chemical analysis of every product, we saw which is something no. Other non hint drive dietary supplement does.
With regards to safety and efficacy we have made significant investment in both safety and clinical studies for efficacy.
We have successfully navigated the regulatory submission processes in other countries, including the U K you in several Latin American countries. Despite her wealth of data, providing the safety and efficacy of our products. We have attempted to work through this process with the U S. F D a to no avail.
It is our position that see what AMD based upon a reasonable interpretation of applicable federal law.
But our products are fully compliant and legal dietary supplements under the food drug and cosmetic act as amended by the dietary supplement health and Education Act, we maintain compliance the same as all responsible dietary supplement brands by addressing the four corners of the act.
C G M P.
Lately in claims adverse event reporting an ingredient safety we.
We have sold millions of servings to hundreds of thousands of consumers without any adverse events or products have been consumed by Olympic athletes UFC champions talk professional golfers motor sport champions and athletes and the NFL NHL NBA and MLS.
Just to name a few.
First responders rely on our products to help them with maintaining health and wellness.
D. M. D has earned customer trust and established ourselves as leaders in the industry.
We're considering all of our options to ensure that our customers are not denied access to safe efficacious dietary supplements and we hope that this oversight hearing.
Can shed light into why the FDA has failed in their statutory obligations and possibly bring a responsible and reasonable conclusion to the sparse without the need to seek redress in the courts.
And thank you Buck.
Thank you for that running back to Brad.
Thank you settle total net sales for the third quarter fiscal 2023 were $6 1 million or 20 or 28% decrease from the prior year comparative quarter total sequentially sales were essentially flat our quarterly e-commerce direct to consumer business generated sales of $5 million in the third quarter of fiscal two.
'twenty three because of a 26% year over year quarterly decrease we believe year over year sales were impacted as we reduced underperforming marketing spend marketing expenses and macroeconomic forces on consumers' sequentially. We improved e-commerce sales by two 6% E Commerce represented 82% of our.
Net sales for the third quarter of 23 versus 76% in the prior year comparative quarter.
Our wholesale business generated $1 1 million of net sales for the third quarter of fiscal 'twenty, three down 46% as compared to $2 1 million for the comparative quarter in fiscal 'twenty. Two this decrease is primarily attributable to our lower price structure over the prior year period.
Our gross profit as a percentage of net sales came in at 63% for the second quarter of fiscal 'twenty. Three this compares to 69% for the comparative prior year period.
We expect to maintain gross profit margins in the mid sixties range when factoring in sales mix.
Our SG&A expenses for the third quarter of fiscal 'twenty, three totaled $5 7 million, which is down from $8 3 million in the prior year comparative quarter, when excluding $30 million of impairment of goodwill and intangibles.
Came down across the board as management continues to focus on profitability.
Excluding depreciation amortization stock expense or a 360 amortization.
SG&A expenses came down over 4 million from $8 7 million last year to $4 4 million in the current quarter sequentially cash SG&A declined approximately 400000, primarily due to reductions in payroll legal and other operating expenses.
Overall this resulted in a loss from operations of approximately $1 8 million for the third quarter of fiscal 2023 as compared to $2 4 million loss from the prior year period, excluding the impairment of goodwill and intangibles.
Meaning we reduced our law $600000 over prior year on a GAAP basis.
Sequentially operating loss increased by 400000, as our amortization of our eight 316 noncash expense increased nearly 700000 for the March 2023 quarter.
Our non-GAAP adjustments to operating expenses for the third quarter of fiscal 2023 included a 61000 in non cash employee stock expense.
376000 in depreciation and amortization expense and 779000 associated with noncash a R credits related to our marketing agreement with <unk> hundred 60, <unk>, resulting in a noncash adjusted operating loss of 608000 for the third quarter.
Fiscal 2023, as compared to a $2 7 million and non-GAAP adjusted operating loss in the third quarter of fiscal 2022.
The decrease in non-GAAP adjusted operating loss over the prior year periods, primarily attributed to management's focus on our cost structure and profitability.
Coincidently, our non-GAAP adjusted operating loss improved about 200000 from the March 2023 quarter.
Based on July results and current quarter run rate, we are anticipating a continued reduction in both GAAP and our non-GAAP adjusted operating loss for the fourth quarter we.
We invested 25000 on C. B D M D Therapeutics R&D during the second quarter of fiscal 2023 as compared to 114000 in 2022.
Cost of our clinical studies are wrapping up and their costs were frontloaded.
Simple previously mentioned kicking off our new study with wood.
This was accrued for in prior quarters, we continue to believe the results from our clinical studies provide us with a unique differentiated positions for both product efficacy and education in the category.
Other income expense on our consolidated income statement for the third quarter of 2023 include the noncash contingent liability gain of 45000 related charges in both 2018 acquisition of cure based development the.
The earn out contingent liability is currently on our balance sheet for 122000, we are now in the fourth marking period that runs through November of 2023.
During the third fiscal quarter of 2023, we utilized approximately $1 $7 million of cash. The main components included our adjusted non-GAAP operating loss of 600000 and paid dividends of 1 billion, while working capital adjustments make up the difference.
We had cash and cash equivalents of approximately $2 8 million and working capital of approximately $5 7 million on June 30 of 2023 as compared to cash and cash equivalents of approximately $6 7 million and working capital of approximately $10 7 million as of September 30th 2022.
Our current assets as of June 32023 decreased approximately 37% from September 20, <unk> September 30th 2022 to $10 1 million.
A primary driver of the decrease in current assets was the usage of cash for operations and the reduction of prepaid sponsorships that one point.
Mostly attributed to the termination of an athlete sponsorship.
We completed an underwritten public offering of.
One 1.350 million shares of our common stock at a public offering price of $2.10 per share.
Gross proceeds from the offering before deducting underwriting discounts and commissions and offering and offering expenses were approximately $2 8 million as of June 32023 of the company's total current liabilities were $4 4 million of which approximately $1 4 million as accounts payable and $1 7 million as occur.
Crude expenses.
We maintain a strong commitment to prudent prudently managing our cash position and ensuring liquidity. Our unwavering attention is directed towards rebuilding our revenue and optimizing our cash SG&A expenses we.
Anticipating ongoing decreases in Aussie and payroll expenditures due to our migration to shopify.
In other areas. Our team is actively engaged in projects aimed at refining our cost structure and enhancing cash margins. Our focus remains determined on delivering value to all of our shareholders.
And with that I'll turn it back to Ronan.
Thanks, Brad.
Wavering commitment to a prosperous future husband resolute underscored by calculated hard decisions and Swift action, we've taken over the last eight quarters.
Our strategic choices continue to yield positive outcomes evident in our stabilized revenue and constantly improving EBITDA.
We are meticulously building, a health and wellness business centered around natural products tailored to thrive within the current regulatory framework, while maintaining the agility to navigate future uncertainties and adapt to varying macroeconomic conditions with our sights firmly set on achieving break even EBITDA.
This quarter, we were driven by an exceptional and determined team that remains dedicated to tangible results.
The upcoming months hold promise and our team's enthusiasm is palpable as we anticipate the opportunities that lie ahead.
With that I'd like to open up the call for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request. If you were using a speaker phone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two one.
Again to join the question queue. Please press Star then one now.
Our first question comes from Adam Waldo of Lismore Partners. Please go ahead.
Yes. Good day, thanks, very much for taking my questions a couple of.
Questions as it relates to the outlook for your ambition to achieve EBITDA breakeven here in the third quarter and then your outlook prospectively for the fourth quarter.
When we last met following first quarter results you were hoping to achieve that.
But the couple of next couple of quarters as I kind of look at.
Cash burn here in the second quarter.
You know you may be burned something on the order of a little more than $1 billion, what what do you see as the cash burn outlook for the third and fourth quarters absent any impact from the potential proxy.
The proposal for the special meeting.
Hum.
Adam Thanks for the question I think you know when you look at the dividend it sets out a million dollars a quarter.
Outside of that we continue to make operating improvements a quarter and a quarter over quarter. We've got our sights from it you know our operating cash flow excluding the the dividend for I guess, our fiscal third quarter. I think we were down to about 600000, maybe I think maybe an extra 100000.
For working capital. Our goal is is breakeven for this quarter, excluding the the dividend and continuing to improve thereafter.
Okay, No that's very helpful and how how much visibility do you feel you have on that now in terms of the outlook for the third quarter and I know, obviously, the fourth quarter will come into view over time, given the business model.
But look there's no no.
We.
We're working very hard and hitting those numbers, we're confident in where our.
Our cost structure is and has migrated to since the last quarter and we're continuing to see.
Topline nudge in and are in an encouraging direction.
Beyond our right in there right now I guess for us to continue to forecast out beyond and have clarity I think we continue to improve our fundamentals and are working to accelerate so we sort of.
Our providing guidance going into the December 30th.
No that's fair given the business model I appreciate the commentary on the third quarter last question is around obviously the capital structure discussion here.
Sensibly and the recent proxy for the special meeting in August with some additional color in the press release.
<unk>.
What what you've laid out some of the downside scenarios, obviously that arise for preferred holders.
Arguably common holders as well.
If it's not approved but obviously at this point the capital structure such that the company is being run for the preferred holders. So the.
They also effectively control the boat. So do you feel you've offered enough enticement to the preferred holders of Belo Pro rata you know approximately 80% of the company.
You know given that they basically own all of it now plus are entitled to a dividend.
Whether our crews in liquidation or I shouldn't say liquidation in our strategic M&A environment.
But.
Look we we've.
Worked hard on our solution its been challenging due to the fact that those securities are public and we think that.
It requires both classes of shareholders two to approve.
So it's a balancing act of of making sure we provide sufficient to both classes.
So that there's a prosperous future for an upside for both classes of shareholders.
Okay Fair point I guess, a final question, if you'll permit me with respect to option resets and restricted stock resets for management employers will all of them suffer a similar dilution to the common shareholders I didn't see that clearly addressed in the proxy or the press release. So can you comment on.
That to the extent that you are willing to do so on a public call.
Look the E. R. R equity plans are tied to the existing common stock and yeah. There. The provisions are sort of set so so yeah. There's there's at this point in time, there's been no.
We set too.
Any of the plans are that are currently outstanding.
So we would be similarly diluted alongside the common shareholders along the yeah all of the common shares well yeah to put it differently I guess historical grants would all be dilutive pro rata perspective grants will be whatever they'll be under the board approved compensation plan, It's fair for a combo.
Correct, yes.
Okay. Thank you.
Once again, if you have a question. Please press Star then one our next question comes from Anthony Vendetti of Maxim Group. Please go ahead.
Thank you.
Yeah, Ron and I was just wondering.
Yeah.
You know I know you've had to cull a lot of products.
And I know you you canceled some contracts with some sports figures and so forth to cut costs and you've already done a lot of that.
I was wondering if you have an update.
Obviously, you always be.
Looking over the product portfolio, but are you largely done with with the initial round of cuts and then and then is it is it just going to be you know an ongoing review or is there still is there still.
You know more to go in terms of getting to where in terms of right sizing the portfolio and getting it where you need to be right now.
And then if so as you look to.
And selectively.
They didn't do the new products that you may launch in the future a have to have a mid 60%.
Plus gross margin.
And there's extra question look we're constantly evaluating our product portfolio to ensure that we've got products that meet our customers' needs. Yeah. When you look at that through sell through data through reviews through you know customer feedback with our customer service line. So I think.
Yeah, there isn't should always be a never ending sort of assessment of where we're at with do we have the right product portfolio.
What are the low hanging fruit that are underperforming and how do we continue to evolve and make it more effective product portfolio a debt that we have an exciting consumer base for so are we done.
Yeah, we should never be done trying to optimize our product portfolio. We are trying to be very smart as we come out with new skus about how do they fit within the portfolio what are the new.
You know what why is it coming out how does it fit our customer need.
And really understand the justification and then really look at sort of what distribution channel is targeting and what our appropriate gross margins for those products. So while we have products are healthy.
Our healthy gross margins.
Yeah, if if we're able to sort of open up new channels and new markets. We would certainly look at evaluating sort of.
Various different gross margin requirements as we continue to evolve our product portfolio.
Okay, great. Thank you so much I'll hop back in the queue.
This concludes the question and answer session I would like to turn the conference back over to Mr. Kennedy for any closing remarks.
I'd like to think Oh everyone's support today and look forward to a lot more vocal activity over the coming 60 to 90 days as we continue to move towards fiscal year end. Thank you very much for your support and we look forward to our call in December .
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
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